A Look At The Trends That Will Drive iPhone Sales

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The iPhone remains Apple‘s (NASDAQ:AAPL) most important product by far, accounting for about 60% of the company’s enterprise value and about 47% of its market capitalization, according to our estimates. While shipments have continued to rise (17% year-over-year during Q2 FY ’14) , driven by aggressive marketing in emerging markets and some new carrier alliances, growth rates and market share have been declining. The company’s market share as of Q1 CY 2014 stood at around 15.2%, down from around 17% a year ago. [1] In this note, we take a look at some of the factors that are likely to influence iPhone sales going forward.

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China Mobile Deal and Emerging Markets Focus

China has overtaken the U.S. as the world’s largest smartphone market by volume despite the fact that 3G penetration in the country is estimated to be just about one-third that of U.S. Apple has been looking to ride the growth wave in the Chinese market, recently signing a deal to sell the iPhone to customers of China Mobile (NYSE:CHL), the worlds largest mobile carrier. While the iPhone has been available with Chinese carriers for some time now via Apple’s subsidy arrangements with China Unicom and China Telecom, the China Mobile deal will have a more significant impact on sales since the addressable market is much larger (about 750 million subscribers). Apple’s Q2 sales in China rose by around 13% year-over-year, owing largely to the China mobile deal. Apple is also getting more aggressive in emerging markets, promoting older iPhone models such as the 4S at discounted prices. During the company’s Q2 conference call, management noted that iPhone sales in China, Brazil, Indonesia, Poland and Turkey grew by double-digits year-over-year and more than doubled in India and Vietnam.

A Larger Screen Model Could Help Apple Gain Market Share

Large screen sizes have been a key driver of smartphone sales of late, as some consumers prefer the improved viewing and on-screen typing experience that these phones offer. Apple has been notably absent in the large-screen space, with its flagship iPhone 5S sporting a 4 inch screen, and it’s likely that many high-end customers have been flocking to premium Android phones due to the lack of a large-screen handset in Apple’s product portfolio. Samsung  has been a key beneficiary of the “phablet” trend, aided by its high-end Galaxy S and Galaxy Note series, whose latest iterations sport screen sizes of 5 inches and upwards. For instance, Samsung’s 2013 flagship, the Galaxy S4, crossed shipments of 40 million units within the first six months of sales. However, Apple is rumored to be launching a large-screen iPhone later this year. We believe that such a product could help Apple extend its domination of the high end of the market, considering that its devices typically offer a more premium design and user experience compared to Android devices.

Rethinking Of Subsidy Model Poses A Threat

Given the high retail price of the iPhone, Apple is dependent on wireless carriers, who reduce the upfront price that subscribers pay for their handsets while recouping the difference through their monthly bills.  However, some carriers have been rethinking the subsidy model of late. For instance, Verizon and AT&T (NYSE:T), the two largest iPhone carriers, have increased the upgrade cycle for new smartphone purchases from 20 months to 24 months, meaning that subscribers will be able to buy new subsidized handsets less frequently. Moreover, some operators such as T-Mobile have done away with subsidies. This has proven to be successful, prompting larger players such as AT&T  to offer their own subsidy-free plans that save customers a certain amount off their monthly bills if they purchase their own device. If the subsidy-free trend gains prominence, it could threaten the sales and pricing power of high-end handset manufacturers such as Apple.

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Notes:
  1. Smartphone Vendor Market Share, Q1 2014, IDC, April 2014 []